Good news may be the last thing Australia needs

Australia is on track to close twin deficits — yet the dramatic turnaround is probably not what the country’s central bank is after.

On Tuesday official statistics revealed the country’s first currentaccount surplus for 44 years — A$5.9 billion for the June quarter. Meanwhile, the Government’s budget is also close to being in the black — or is already there — for the first time since before the global financial crisis.

Both surpluses were underpinned by a surge in iron-ore prices, although that has ended, suggesting any current-account surplus may not last too long.

Reserve Bank of Australia deputy governor Guy Debelle has noted the “significant transformation” from 33 years ago when then-Treasurer Paul Keating warned that Australia’s record current account deficit risked turning the nation into a “banana republic”.

But for the Reserve Bank, with a cash rate at a record low of 1 per cent and forecast to drop to 0.5 per cent next year, a current-account surplus suggests the currency might be a bit stronger than it otherwise would be and investment somewhat softer — the opposite of what is needed in 2019. A budget surplus, meanwhile, means the Government isn’t providing much stimulus to an economy that has slowed sharply and where rate ammunition is running low.

The central bank has been urging the Government to step up activity: infrastructure spending, reforms to enhance productivity and other measures to stoke growth. But the fiscal authorities have been reluctant, instead highlighting planned tax cuts — though the bulk of these only kick in strongly midway through next decade.

The notion that twin surpluses could harm the economy would have been outlandish to Keating, who in 1986 confronted a balance of payments crisis that sent the currency tumbling. In response, he galvanised the electorate behind a reform programme to help the country trade its way out of trouble, and introduced a period of fiscal rectitude designed to balance the budget.

Keating’s reforms would help underpin the economy’s 28 years without a recession, but also turn budget surpluses into an obsession with politicians. That has led to the current situation where Treasurer Josh Frydenberg is prioritising a return to the black over aiding a weakening economy.

Current-account surpluses are “rare beasts” in Australia, with deficits recorded in 133 of the past 159 years, says Michael Blythe, chief economist at Commonwealth Bank of Australia.

A surplus “is typically associated with extreme economic events,” he says. Blythe notes that in addition to the boon of high iron ore exports, Australia’s swelling trade surpluses have been aided by “unusually weak” import growth due to weak domestic spending.

So in a sense, like the budget, the result is a mixture of good luck and not particularly positive omens.